by Calculated Risk on 3/21/2009 10:24:00 PM

If you missed this, Zach Fox at the North County Times had an incredible story: HOUSING: Banks selling properties in bulk for cheap

For example, a unit of Citigroup, the troubled financial giant, sold a foreclosure in Temecula to an Arizona investment firm for $139,000 when comparable homes in the area were selling for $240,000 to $260,000.

The firm listed the home for $249,000, received multiple offers and the property has entered escrow, said Amber Schlieder, the real estate agent who handled the listing.

Citi just left $100,000 on the table.

I hear stories like this all the time.

Here is a short video from KCET with a couple more examples (these are short sales):



Clearly the banks are overwhelmed and the process is broken. Maybe there is an opportunity here for added transparency ...

by Calculated Risk on 3/21/2009 08:06:00 PM

Randyl Drummer at CoStar writes: Rising Cap Rates Add to Real Estate Investors' Worries. Here are some stats:

In fourth-quarter 2007, 180 closed transactions of Class A office sales of more than $5 million were recorded, trading at an average actual cap rate of 6.1% nationally. By the last three months of 2008, the average cap rate spiked to 7.6% on just 80 transactions, including a jump of more than 100 basis points between the third and fourth quarters. With sales results for the quarter still being collected, CoStar had recorded 42 closed transactions at an average actual cap rate of 7.9% as of March 18.

Investors closed 279 sales of Class A and B warehouse and distribution property in the fourth quarter of 2007 at an average cap rate of 7.1%. The number of transactions dropped sharply in fourth-quarter 2008, with the cap rate rising 100 bp. First-quarter 2009 is continuing to trend toward a sharp drop in transactions, with the cap rate edging up another 50 bp to a preliminary 8.6% as of March 18.

In the apartment sector, a look at sales totaling $5 million or more shows that 629 Class A properties exchanged hands in fourth-quarter 2007 at an average actual cap rate of 5.9%. For the same period a year later, 355 transactions sold and the average cap rate rose 90 basis point to 6.8%, thanks to a 50-bp jump between the third and fourth quarters. Though deal volume appears to be again dropping sharply in the first quarter, the cap rate for closed transactions was holding steady at 6.8% in the quarter to date -- the only major property category to hold the line on cap rate expansion.

So for Class A office space, average actual cap rates have risen from 6.1% in Q4 2007 to 7.9% currently.

For Class A and B warehouse and distribution properties, cap rates have risen from 7.1% to 8.6% over the same period.

And for Class A apartments, cap rates have risen from 5.9% to 6.8%.

This is just another way of saying prices have fallen sharply. Most small investors buy Class B or C apartments, and I'd be curious about those cap rates.

by Calculated Risk on 3/21/2009 01:59:00 PM

Earlier I posted the publicly released economic scenarios from the Supervisory Capital Assessment Program (bank stress tests).

The following graphs shows the stress test economic scenarios on a quarterly basis as provided by the regulators to the banks as part of the FAQs (no link). I've also added the most recent forecasts from Paul Kasriel at Northern Trust, and from Goldman Sachs (no link) for comparison.

The first graph is for the unemployment rate through 2010. This is a quarterly forecast - the January unemployment rate was 7.6% and February 8.1%.

Click on graph for larger image in new window.

Although the two private forecasts don't include all of 2010, it appears that both the Kasriel and Goldman forecasts are near the "more adverse" scenario for 2009.

The second graph makes the same comparison for changes in real GDP.

An interesting note: the stress test scenario is using the advanced GDP release estimate for Q4 2008 of -3.8%, as opposed to the revised estimate of -6.2%.

Once again the private forecasts are tracking much closer to the the more adverse scenario than the baseline scenario.

And please don't think Kasriel and Goldman are UberBears. From Paul Kasriel: Light at the End of the Tunnel or an Oncoming Freight Train?

With regard to the economy, we believe there are faint signs of light at the end of the tunnel. Real consumer spending increased by 0.4% in January (and is likely to be revised up) and the decline in February nominal retail sales of 0.1% suggests that the decline in real consumer spending that month will not be severe. For the first quarter as a whole, we now expect a contraction in consumer spending much less severe than last year’s fourth-quarter contraction of 4.3%. Although we do not expect to see outright growth in real consumer spending until the fourth quarter of this year, we believe the deepest quarterly contraction is behind us. With light motor vehicle sales idling just above 9 million units at an annual rate, it appears that for the first time since 1945 there are more used cars and trucks being scrapped than there are new ones getting out on the highways. At some point in the not-too-distant future, the purchases and production of cars and trucks will be stepped up.

These are the points I've been making and I also think there is a good chance (better than a coin flip) that GDP will turn slightly positive later this year. However I also think any recovery will be very sluggish.

Even with these "faint signs of light at the end of the tunnel", it appears the "more adverse" scenario is now the real baseline.

by Calculated Risk on 3/21/2009 05:30:00 AM

The NY Times has some details ...

From Edmund L. Andrews, Eric Dash and Graham Bowley: Toxic Asset Plan Foresees Big Subsidies for Investors

The plan to be announced next week involves three separate approaches. In one, the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.

In the second, the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money.

In the third piece, the Treasury plans to expand lending through the Term Asset-Backed Secure Lending Facility, a joint venture with the Federal Reserve.

More approaches doesn't make a better plan.

The FDIC plan involves almost no money down. The FDIC will provide a low interest non-recourse loan up to 85% of the value of the assets.

The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money ... Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.

With almost no skin in the game, these investors can pay a higher than market price for the toxic assets (since there is little downside risk). This amounts to a direct subsidy from the taxpayers to the banks.

Oh well, I'm sure Geithner will provide details this time ...

by Calculated Risk on 3/21/2009 12:14:00 AM

"And for those of you wondering about yours truly — I’m temperamentally unsuited, have never had any desire for the job, and probably have more influence as an outside gadfly than I ever could in DC."
Paul Krugman on the possibility of being appointed Treasury Secretary, Nov 26, 2008

by Calculated Risk on 3/20/2009 08:35:00 PM

Swirling Overhead...
Regulators swoop and seize,
None "too big to fail".
by Soylent Green Is People

First two large Corporate Credit Unions were seized today by the National Credit Union Administration (NCUA): U.S. Central and WesCorp. These two credit unions had a combined $57 billion in assets.

A couple of key points: these "corporate credit unions" don't serve the general public, and all "natural person" credit union money held at these corporate credit unions was guaranteed earlier this year.

From the WSJ: U.S. Seizes Key Cogs for Credit Unions

The affected institutions don't serve the general public. They provide critical financing, check clearing and other tasks for the retail institutions. These wholesale credit unions, known in industry parlance as corporate credit unions, are owned by their retail credit-union members.

And from the NCUA January letter to Credit Unions:

Offering a temporary National Credit Union Share Insurance Fund (NCUSIF) guarantee of member shares in corporate credit unions. The guarantee will cover all shares, but does not include paid-in-capital and membership capital accounts, through December 31, 2010. This guarantee is the equivalent of full share insurance on member shares and will be extended beyond that date by the NCUA Board if necessary.

So the natural person credit unions (the ones that serve the public) have had their money guaranteed.

Still the losses will be huge:

[Michael E. Fryzel, chairman of the National Credit Union Administration, the industry's federal regulator] said NCUA's latest estimate is that wholesale credit unions will eventually have to realize between $10 billion and $16 billion in losses on their holdings. The agency on Friday also raised its estimate for what these losses will cost its insurance fund, to $5.9 billion from the prior $4.7 billion estimate.

Three FDIC insured banks failed today. The FDIC estimates the combined cost to the Deposit Insurance Fund will be just over $200 million.

The WSJ reports that the Geithner toxic asset plan might be announced on Monday: U.S. Sets Plan for Toxic Assets

The federal government will announce as soon as Monday a three-pronged plan to rid the financial system of toxic assets, betting that investors will be attracted to the combination of discount prices and government assistance.

HotelNewsNow.com reported that year-over-year hotel occupancy rates were off 15.7 percent. See: Hotel Occupancy Rate Off Sharply for data and a graph.

by Calculated Risk on 3/20/2009 07:29:00 PM

From the FDIC: Herring Bank, Amarillo, Texas, Assumes All of the Deposits of Colorado National Bank, Colorado Springs, Colorado

Colorado National Bank, Colorado Springs, Colorado, was closed today by the Office of the Comptroller of the Currency, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Herring Bank, Amarillo, Texas, to assume all of the deposits of Colorado National.
...
The FDIC estimates that the cost to the Deposit Insurance Fund will be $9 million. Herring Bank's acquisition of all the deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Colorado National is the nineteenth FDIC-insured institution to fail in the nation this year and the first in the state. The last FDIC-insured institution closed in Colorado was BestBank, Boulder, on July 23, 1998.

From the FDIC: Great Southern Bank, Springfield, Missouri, Assumes All of the Deposits of Teambank, National Association, Paola, Kansas

Teambank, National Association, Paola, Kansas, was closed today by the Office of the Comptroller of the Currency, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Great Southern Bank, Springfield, Missouri, to assume all of the deposits of Teambank.
...
The FDIC estimates that the cost to the Deposit Insurance Fund will be $98 million. Great Southern Bank's acquisition of all the deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Teambank is the twentieth FDIC-insured institution to fail in the nation this year and the first in the state. The last FDIC-insured institution closed in Kansas was The Columbian Bank and Trust Company, Topeka, on August 22, 2008.

Teambank was affiliated with Colorado National Bank, Colorado Springs, which was also closed today by the Office of the Comptroller of the Currency. The FDIC entered into a separate transaction with Herring Bank, Amarillo, Texas, to assume the banking operations of Colorado National Bank.

That makes three today (the Corporate Credit Unions are different, but probably a bigger story).

by Calculated Risk on 3/20/2009 07:10:00 PM

From National Credit Union Administration: NCUA Conserves U.S. Central and Western Corporate Credit Unions

The National Credit Union Administration Board today placed U.S. Central Federal Credit Union, Lenexa, Kansas, and Western Corporate (WesCorp) Federal Credit Union, San Dimas, California, into conservatorship to stabilize the corporate credit union system and resolve balance sheet issues. These actions are the latest NCUA efforts to assist the corporate credit union network under the Corporate Stabilization Plan.

The two corporate credit unions were placed into conservatorship to protect retail credit union deposits and the interest of the National Credit Union Share Insurance Fund (NCUSIF), as well as to remove any impediments to the Agency’s ability to take appropriate mitigating actions that may be necessary. ...

Corporate credit unions do not serve consumers. They are chartered to provide products and services to the credit union system. These products and services will continue uninterrupted and there is no direct impact by NCUA’s actions on the 90 million credit union members nationwide. ...

U.S. Central has approximately $34 billion in assets and 26 retail corporate credit union members. WesCorp has $23 billion in assets and approximately 1,100 retail credit union members. The member accounts of both credit unions are guaranteed under provisions of the previously announced NCUA Share Guarantee Program, through December 31, 2010. The Program extends NCUSIF coverage to all funds held by the two corporate credit unions.
...
Additional mortgage and asset backed security analysis and assessment of the two credit unions by NCUA staff enabled NCUA to refine NCUSIF’s required reserve for potential loss. The findings indicated an overall estimated reserve level, previously announced by NCUA, had increased from $4.7 to $5.9 billion. The specific computation and the impact of the refined reserve level are addressed in NCUA Letter No: 09-CU-06, which NCUA issued and posted online today at http://www.ncua.gov/letters/letters.html.

NCUA is hosting a webcast Monday, March 23 at 2 p.m. to provide the credit union community with an update on the corporate credit union stabilization program.

Assets of $57 billion? There are some losses coming ...

by Calculated Risk on 3/20/2009 06:26:00 PM

From the FDIC: FDIC Approves the Payout of Insured Deposits of FirstCity Bank, Stockbridge, Georgia

The Federal Deposit Insurance Corporation (FDIC) approved the payout of the insured deposits of FirstCity Bank, Stockbridge, Georgia. The bank was closed today by the Georgia Department of Banking and Finance, which appointed the FDIC as receiver.
...
As of March 18, 2009, FirstCity had total assets of $297 million and total deposits of $278 million. At the time of closing, the bank had approximately $778,000 in deposits that exceeded the insurance limits. This amount is an estimate that is likely to change once the FDIC obtains additional information from these customers.
...
The FDIC estimates the cost of the failure to its Deposit Insurance Fund to be approximately $100 million. FirstCity Bank is the eighteenth FDIC-insured institution to fail this year. The last bank to fail in Georgia was Freedom Bank of Georgia, Commerce, on March 6, 2009.

It feels like Friday ...

by Calculated Risk on 3/20/2009 04:12:00 PM

While we wait for the FDIC, here is a look at the market.

The S&P 500 was off 2%

The Dow was off 1.65%

The NASDAQ was off 1.8%

Click on graph for larger image in new window.

This graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.